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The Real Reason Canadians Pay Higher Prices Than Americans For the Same Products

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Canadian shoppers have long suffered from higher prices on some consumer goods, relative to other countries, especially the United States. In an attempt to "remedy" the situation, the federal government recently introduced legislation -- dubbed the Price Transparency Act -- that will force retailers to explain why Canadians sometimes pay higher prices than Americans for the same products.

Industry Minister James Moore, who announced the proposed legislation, used over-the-top language from historic civil rights struggles to describe the Canada-U.S. price gap, calling the differences between U.S. and Canadian retail prices "geographic price discrimination." Moore admits that other factors often lead to higher Canadian prices -- what he calls "legitimate costs of doing business" in Canada. But he claims the entire gap between U.S. and Canadian price tags cannot be explained by "legitimate" input costs.

If it becomes law, the legislation will allow the government-appointed commissioner of competition to force retailers to disclose "evidence," which might "expose discriminatory pricing practices." But what counts as "legitimate pricing"? Especially given that picking on retailers -- as opposed to any other sector, such as restaurants, the legal profession or fruit sellers on the side of the road, all of whom might charge differently based on their location or their client -- amounts to a sector-specific witch hunt.

Suppose a retailer's margin on Widget X is 10 per cent in the United States and 12 per cent in Canada. Any number of factors could explain the difference. Perhaps the middleman is subject to higher property taxes in one Canadian city vis-a-vis its competitor south of the border. Or maybe it costs more to ship the goods to Canada. To think a government is remotely capable of collecting and properly collating this type of comparative information assumes a degree of specific knowledge that governments do not possess, as it would be impossible to track the millions of business decisions that are made on a daily basis.

All of this, however, ignores one significant reason why some prices in Canada are higher than those in the United States: government policy.

For example, economist Ross McKitrick recently found that, for large industrial users, electricity rates in Chicago in 2012 were 6.12¢ per kilowatt hour. Rates in Toronto were about double that figure. Much of Ontario's rising electricity costs are due to ill-advised and expensive government-mandated feed-in tariffs for wind power and other expensive types of electricity.

That matters to manufacturers in the Greater Toronto Area, because it increases their operating costs, relative to their American competitors.

Or consider another issue: dairy and poultry products. Former Liberal MP Martha Hall Findlay estimated in a research study that Canadian consumers pay one-and-a-half to three times more for milk, cheese and other dairy and poultry products than they should, because of federal "supply management" policies.

Supply management, which Americans do not face, restricts the supply of milk, cheese, eggs, chickens and the like, by limiting domestic production. Imports of these products are also discouraged with tariffs that run as high as 202 per cent for skim milk and 298 per cent on butter. Findlay estimated that the average Canadian family pays $200 more than they should for foodstuff on an annual basis.

Maybe that doesn't matter to some, but as economist Chris Sarlo has noted, wealthier households spend between 5% and 10% of their income every year on food, while low-income households spend almost onequarter of their income on groceries. So, $1,000 in extra food costs over five years means a lot to poorer Canadian families. And government policy is to blame.

One last example -- airline fares. Prices are kept high in Canada by a lack of competition, thanks to federal government policy that prevents full cabotage. Cabotage is where foreign airlines can pick up and drop off passengers in the same country. In Europe, where it is allowed, lower prices result from heightened price competition, something the European Union has repeatedly noted.

The United States and Canada do not allow for full competition, but Americans benefit from a bigger market given their much larger population. Thus, a continental market in airline travel would serve passengers if an American airline could compete head-to-head with Canadian airlines on domestic routes. But the federal government won't allow it. The result is higher airline fares in Canada.

Electricity prices in Ontario. Dairy and poultry products. Airline fares. In each case, governments keep costs high for Canadian consumers. And yet, it's a safe bet that politicians will not be called before the commissioner of competition to explain their price-fixing schemes.

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